Property deductions on your international home

Many Americans who buy a second home in Mexico opt to use their US property for rental purposes. Having a rental property can be an excellent way to generate income while still maintaining a home in the US in the event you wish to return. But having a rental property means you’re obligated to keep a close record of your expenses and income.

When it comes time to file income taxes, you’ll need that information to report any income or losses on your US expat return. According to David McKeegan, MBA and founder of Greenback Expat Tax Services, a company that specializes in the preparation of U.S. expat taxes for Americans living abroad, US expats need to complete an additional form called Schedule E.

Schedule E is where US expats will list all income and expenses for their rental properties. Those who hired a management company will likely get a tidy statement outlining all their income and expenses associated with their property. Since management companies can be expensive, many people manage their own properties. This is when you will need to keep accurate, detailed records of your property for accurate tax reporting.

On Schedule E you can list all the expenses and income for up to three rental properties. Don’t forget to calculate your depreciation expenses, something that is often overlooked. McKeegan says that the amount you depreciate (or ‘basis’) is determined by the lesser of the fair market value of the property or the adjusted basis (which is typically calculated as your purchase price, adjusted for any improvements you made).

He also says there are several deductible expenses that can help lower your US tax liability on the rental property, such as start-up costs. The IRS only permits a deduction of up to $5,000 however, if you exceed that, the remaining costs can be capitalized and deducted over the next 15 years. Common items such as maintenance costs, minor repairs, insurance, permits and licenses and professional fees can all be deducted. You can also deduct the interest paid on a mortgage used to purchase or improve a rental property.

Those who travel to the US from their Cancun or Playa del Carmen home in Mexico can deduct some of their travel expenses. Things such as airfare, meals and lodging can be deducted outright if they are directly related to the management of the property. Having a rental property in the US makes buying your dream home in Playa del Carmen that much easier.